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Mortgage broker, originator and banker criminal cases. Real estate flipping and appraisal fraud. Mortgage fraud prevention, studies and analysis.

Mortgage Fraud Lawsuits to Skyrocket

FDIC chairman testifies before House committee

March 20, 2009

By staff

The Federal Deposit Insurance Corporation is busy investigating mortgage fraud at failed financial institutions and sees nearly a thousand lawsuits tied to mortgage fraud being filed during the next three years.

Mortgage fraud claims have increased to 4,375 as of today from none on Jan. 1, 2007, Martin J. Gruenberg told the House Financial Services Committee today, according to a transcript of his prepared testimony. He was speaking at the House hearing Federal and State Enforcement of Consumer and Investor Protection Laws.

Gruenberg, who is the FDIC's vice chairman, reported that mortgage fraud lawsuits have climbed to 113 from none at the beginning of 2007. Another 900 civil lawsuits are projected during the next three years as a result of claims currently under investigation.

The defendants in the mortgage fraud lawsuits are primarily mortgages brokers, appraisers and other entities in the closing process that were involved in fraudulent loans funded by one of the 5,000 FDIC-insured banks and thrifts.

The executive explained that the FDIC is responsible for resolving all failures of federally insured U.S. financial institutions. Once a closing occurs, FDIC's investigations staff and attorneys swarm in and determine, among other things, if mortgage fraud contributed to the failure and who was involved.

Professional liability investigations conducted since 1986 have yielded $6.1 billion in recoveries, though $1.4 billion was incurred in expenses. But the high volume of recent failures -- 17 so far this year as of the time of his testimony and three more reported after his testimony -- are expect to push professional liability activity and recoveries substantially higher.

One case was cited on an loan from IndyMac Federal Bank FSB -- which was seized by the Office of Thrift Supervision on July 11, 2008, and sold by the FDIC yesterday. In addition to an inflated appraisal, fake mechanics liens and a property that had been listed for less than the sales price -- a straw buyer was handed a suitcase with $10,000 cash in it.

Two loans for $885,000 wound up costing IndyMac $500,000 in losses.

"The borrower signed two loan applications falsely representing her employment, income and residence, in return for round trip first class airfare from Brooklyn to Houston and car service in Houston to attend the loan closings, in addition to the briefcase of cash," Gruenberg said. "She never resided in the house or made a payment on the loans. In this case, fraud was committed against the FDIC-insured lender by the appraiser, the closing agent, and the borrower."

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